Senate Resources Committee Introduces Changes to Oil Tax Bill

Published: February 25, 2013

Committee Substitute for SB21 retains requirements for production without tax reduction

JUNEAU-Today, the Senate Resources Committee introduced its changes to the Governor’s Oil Tax Proposal. The new committee substitute for Senate Bill 21 keeps many of the bill’s original provisions, but slightly increases the state’s take when oil prices are high and reduces the state take when oil prices are low. Under the amended legislation, total government take at the high end (around $150 a barrel) would reach about 65%, which is competitive with other similar oil producing regions, and remains fair to Alaskans. The new proposal also basically flattens the government take at all oil prices, which creates a stable and favorable climate in which to do business.

“The Governor has asked for a tax system that meets four principles: It’s fair to Alaskans, encourages new production, is simple and balanced, and is competitive and durable,” said Senator Cathy Giessel, Chair of Senate Resources. “Our committee meets those principles while adding a few things that will improve the overall effectiveness of the bill.”

“Through many hours of public, agency and producer testimony, we learned much about what folks felt could improve the bill for Alaskans. Through what we call the ‘35/5 rule’, we increased the effective tax rate for a slightly progressive system to improve Alaskan’s share and lessen the impact on the budget,” said Senator Peter Micciche, R-Soldotna. “Senator Giessel did an incredible job of leading the Resources team by taking the items discovered by the TAPS Committee and providing the foundation to blend them into Resource Committee improvements. The (CS) provides a tax structure competitive with other OECD producing areas, an environment for increased production of new oil, and more revenue to support critical services such as education, public safety and transportation.”

The committee substitute for Senate Bill 21 slightly increases the bill’s gross revenue exclusion (GRE) provision, giving producers a 30% reduction for any new oil put in the pipeline. And the committee substitute adds a new provision that would apply the GRE to newly expanded participating areas within current units, but only if that expansion brings forth new oil that would not have been produced under the old rules.

“This new provision adds incentives for companies to try new technologies that could break through to new oil which right now would be considered unreachable, for example using horizontal drilling, or new technologies to reach heavy and viscous oil,” said Senator Giessel. “We can’t just keep relying on the traditional technologies that have put the legacy fields into a spiral of decline. We need to find new ways to get at oil that is already near existing production facilities.”

The new committee substitute also includes a corporate tax break for Alaskan company that manufactures products to be used in Alaska’s oil and gas fields. “An Alaskan corporation with an income tax liability that manufactures goods in Alaska for use in the oil and gas industry qualifies for a credit against that tax liability,” said Senator Click Bishop, R-Fairbanks. “This provision will help Alaska manufacturers become more competitive with the goal of providing more jobs for Alaskans.”

The new committee substitute keeps Governor Parnell’s original intention of removing the capital credits and progressivity, but makes up for it with the GRE and other after production incentives.

“Right now, we are giving away anywhere from $600 million to $1 billion a year in credits. If these credits were working, we wouldn’t be continuing to see the decline that we are,” said Senator Giessel. “Our current credits have incentivized spending not production.”

The bill creates a Competitiveness Review Board which will consist of nine members to assess the ongoing competitiveness of the State against similar oil producing regions. The board will be not include legislators and will feature two members from non-profit or trade organizations representing the industry, the chair of AOGCC, the Commissioners of DNR, DOR, and DEC, and three public members including a petroleum engineer, a geologist, and an economist who must have field experience with Alaska’s oil production system.

“The Competitiveness Review Board is something I learned about while I was President of Pacific Northwest Economic Region from our neighbors in Alberta who suffered the dire economic consequences of adopting an uncompetitive oil tax system. It’s important to have a board that is non-political that continues to reflect on Alaska’s competitiveness in the oil and gas industry, which is the number one private employer by far in this state and contributes 90% of the money in the state’s coffers,” said Senator Lesil McGuire, R-South Anchorage. “My goal with the Competitiveness Review Board is to remove the politics that all too often overshadow facts in this debate. In Alberta, the Competitiveness Review Board was able to lead efforts for reform that have successfully reignited industry and business in that province.”

So far, the Senate Resources Committee has held nearly a month of extensive meetings on Senate Bill 21, including several hours of testimony from industry experts, consultants, and members of the public. More meetings are scheduled into the first week of March.

“The oil tax bill, that is before Senate Resources, with the recent changes is a significant improvement over the present ACES oil tax law. It is a work in progress and I am encouraged by the new changes,” said Senator Fred Dyson, Vice-Chair of the Senate Resources Committee. “We want to do all we can to encourage new exploration. We realize that the best opportunities for increase North Slope production will come from the Prudhoe and Kuparuk units in the short and mid term. Our new oil tax structure bill makes significant progress for both.”

“At this point I’m encouraged that the Senate is moving in the right direction on this bill. All of the pieces are in place to increase production and the probability of a future sustainable Alaskan economy,” said Senator Micciche. “At the end of the day, we’ve set the proverbial table and it’s time for the producers show up for dinner.”

For more information, please contact Margaret Dowling in Senator Giessel’s Office at 907-465-4843.